News of Note
Finance proposes to extend the principal residence exemption to an inter vivos disability trust
Email this ContentBeginning after 2016, eligibility for the principal residence exemption was limited to three categories of trusts, including a qualified disability trust that was a testamentary trust - so that an inter vivos trust established for the benefit of an individual eligible for the disability tax credit (DTC) was excluded. Finance has now provided a comfort letter recommending, effective for taxation years beginning after 2016, that the principal residence exemption be amended to also accommodate an inter vivos trust for a resident child, or present or previous spouse, of the settlor, where that beneficiary is eligible for the DTC and, during his or her lifetime, no other person can obtain the use of the trust income or capital.
Neal Armstrong. Summary of 4 September 2019 Finance comfort letter under s. 54 – principal residence – (c.1)(iii.1)(B).
Finance provides comfort letter opening up statute-barred years for additional s. 20(1)(v) deductions
The Mining Association of Canada suggested that it was inappropriate for taxpayers, who had been provincially reassessed for additional mining taxes to lose the additional s. 20(1)(v) deduction because the reassessed years were now statute-barred. Finance has provided a comfort letter recommending (retroactive to taxation years that end after 2007):
that a deduction for mining taxes be allowed for the taxation year in which the mining taxes are paid if the mining taxes paid are in respect of income from mining operations that were carried on in a prior taxation year of the taxpayer that is barred from reassessment under the Act.
Neal Armstrong. Summary of 3 September 2019 Finance comfort letter under s. 20(1)(v).
CRA is refusing requests for Canadian branches of foreign FIs to register for GST/HST purposes
A Canadian branch of a foreign financial institution that has imported taxable supplies potentially may reduce its compliance burden (i.e., less frequent returns and payments – but with the potential to then be required to file an annual information return) if it voluntarily registers for GST/HST purposes.
However, the CRA is increasingly refusing such applications; its reason is that the existence of a Canadian branch does not make the financial institution a Canadian resident for GST/HST purposes. …
This is puzzling since ETA s. 132(2) provides that a non-resident person with a permanent establishment in Canada is considered to be resident in Canada in respect of the person's activities carried on through that establishment.
Neal Armstrong. Summary of Andrew Linton and Jillian Adams, “CRA Denies Voluntary GST/HST Registration for Financial Institutions,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p. 7 under ETA s. 240(3).
CRA finds that a fee paid for taking a financing from signing through to closing bears GST/HST
A lender retained another company in acting as its agent in doing due diligence on the borrower, with whom it had signed a credit agreement but not yet made the loan, and in managing the process through to the closing of the agreement. In finding that a non-refundable up-front fee paid by the borrower to the agent was for a taxable service under the para. (r.4) exclusion from the financial service definition (re the provision of a service preparatory to a listed financial service) rather than being an exempted “arranging for” financial service, CRA stated:
As part of the due diligence for underwriting the transaction, [the loan agent] engages an independent engineer and an insurance consultant to prepare their third-party reports, completes a financial model, prepares a confidential information memorandum for a potential lender, prepares credit documentation with its legal counsel, and arranges for the closing and the funding of the project. The predominant nature of the service … is preparatory in nature to the … potential provision of a financial service, that is, the lending … .
In light of the italicized passage, this ruling arguably is inconsistent with the Global Cash Access line of cases, which finds there to be an exempt financial service if that was what predominantly was being paid for, even if the fee recipient was also doing substantial work to that end.
CRA also ruled that a fee paid to the loan agent by another lender was a taxable loan-management under the para. (r.3) exclusion from “financial service.”
Neal Armstrong. Summaries of 2 May 2019 GST/HST Ruling 150998 under ETA s. 123(1) – financial service – para. (r.4), para. (r.3).
CRA income tax severed letters schedule for tomorrow and the holiday season
There will be three deviations from the usual Wednesday-morning release schedule of the Income Tax Rulings Directorate:
- Letters will not be released tomorrow.
- Letters will come on December 23rd, not the 25th.
- Letters will come on the December 30th, not the 31st.
Chen – Federal Court accepts CRA suggestion of filing a T1135 with estimates to avoid late-filing penalty
After finding that it was reasonable for CRA to decline penalty relief to the taxpayer for filing a T1135 form seven weeks late (along with her regular return, which did not attract a penalty because there was no tax owing) given that she had done the same thing a year previously, McVeigh J turned to one of the taxpayer’s excuses, which was that she had been in another city from February to May 2016, and essentially accepted CRA’s comment that the taxpayer “could have instead filed an estimated 2015 Form T1135 and then amended it once she had her documents.”
Neal Armstrong. Summary of Chen v. Canada (Attorney General), 2019 FC 1435 under s. 220(3.1).
Coop de travailleurs en serres Belle-de-Jour – Court of Quebec finds that greenhouse heating equipment was used in non-farming manufacturing of floral arrangements
The taxpayer used approximately 20% of the area within greenhouses to grow cucumbers or other vegetables, or flowers, from seed for sale as grocery items or as little plants that could be transplanted. The taxpayer also annually produced about 85,000 floral arrangements in pots, which it sold to retailers such as Costco. To this end, it purchased already-grown flowers from other growers, and maintained them in its greenhouses pending its use of them for incorporation into the floral arrangements. Between 2012 and 2014, it constructed a biomass system for heating the greenhouses.
Gibbens JCQ found that this system qualified as a Class 29 property that entitled the taxpayer to investment tax credits, i.e., it was used primarily for the manufacturing or processing of good for sale. Although the ARQ vigorously argued the contrary view, the floral arranging activity clearly was manufacturing or processing. The central issue instead was whether this activity was part of the taxpayer’s (greenhouse) farming business. “Farming” was an excluded activity.
In finding that the floral-arranging activity instead was a separate business, Gibbens JCQ stated:
Nothing otherwise suggests that the two activities were dependent one on the other. In particular, the floral arrangements were manufactured exclusively from already-grown plants that had been purchased by the Coop from third-party suppliers and not from flowers that the Coop had grown for sale as small plants to be transplanted.
Since the biomass heating system was used “primarily” in the qualifying activity, the credit was available.
Neal Armstrong. Summary of Coop de travailleurs en serres Belle-de-Jour v. Agence du revenu du Québec, 2019 QCCQ 6609 under Sched. II, Class 29.
6 more translated CRA interpretations are available
We have published a CRA interpretation released last week and a further 6 translations of CRA interpretations released in May 2011. Their descriptors and links appear below.
These are additions to our set of 1,011 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for December.
Cristofaro – Court of Quebec finds that a resale of a house by a renovator within one year gave rise to a capital gain
One of the taxpayers and a friend purchased a Montreal house for $1,050,000 with the intention of renovating it and renting it out. Renovation expenses escalated to $492,000. Unable to rent it out and with expenses beyond what they could handle, they sold the property for $1,700,000 a year later. Forlini, JCQ found that the taxpayer had realized a capital gain, stating that neither the taxpayer nor his friend (Mr. Stephan) were “habitual or sophisticated real estate investors” and that:
If the intention of Jaysen Cristofaro and Mr. Stephan changed after the purchase, this is attributable to the skyrocketing renovation costs and the difficulty in finding a tenant, and not because they were motivated by realizing a profit through a quick flip.
… The evidence does not establish that in the minds of Jaysen Cristofaro and Mr. Stephan, the possibility of resale was an operating motivation for the purchase.
Essentially the same findings were made respecting a somewhat similar transaction of Jaysen’s mother.
This case followed the Hickman approach of considering that once the taxpayer has made out a prima facie case, the burden of persuasion shifts to the Minister. The Hickman approach was doubted in, for example, Morrison, Lohas and in comments of Webb JA in Sarmadi. This may be an example of a case where that approach to onus mattered, i.e., the prima facie case that the high renovation costs could not be foreseen seemingly put the burden of persuasion back on the ARQ.
Neal Armstrong. Summary of Cristofaro v. Agence du revenu du Québec, 2019 QCCQ 6242 under s. 9 – capital gain v. profit – real estate.
Holland – Federal Court finds that a taxpayer could not challenge a CRA residency determination that had not yet been assessed
The taxpayer, who left Canada in 2004 and returned in January 2010, filed a voluntary disclosure application in July 2015 covering the period from 2004 to 2014, but did not file returns for 2005 to 2009, taking the position that for those years he was a non-resident. On April 25, 2018, CRA issued a letter confirming a position taken two years earlier that the taxpayer continued his residency throughout this period.
McVeigh J confirmed the decision of the Prothonotary to strike the taxpayer’s application for judicial review of this letter on the grounds that it was premature (as the voluntary disclosure application was still outstanding, no determination had been made under s. 220(3.1)), and the Minister’s factual determination of residency could be challenged by filing tax returns for those years (which had not yet been done) and appealing assessments thereof to the Tax Court. She stated:
[H]e cannot judicially review this particular tax process when there has been no assessment and no discretionary decision.
Neal Armstrong. Summary of Holland v. Canada (Attorney General), 2019 FC 1433 under Federal Court Act, s. 18.5.